What is an offset account?
Looking to tackle your loan more efficiently? An offset account could be the key. From reduced interest rates to slashed repayments, this savvy solution can save you thousands of dollars over time!
Understanding offset account
An offset account is a transaction or an everyday banking account linked to your home loan. Like a standard bank account, it allows you to make withdrawals and deposits.
What makes it different is - an offset account allows you to minimise your home loan interest by keeping funds in it for an extended period.
The interest you pay decreases with the principal balance and the time period. This may speed up the time it takes to repay the property loan.
Your monthly interest payment will be reduced by an amount equal to the ‘offset’ amount in your loan savings account. Over time, you may use these savings to pay off your debt faster.
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How does an offset account work?
Understand offset account working by simple example -
Assume you have a property loan of $300,000 with an interest rate of 4%. You have $40,000 in your offset account. You will need to pay interest on $260,000. This will keep happening as long as the $40,000 stays in your offset account.
How much can you save with an offset account?
Continuing the above example, you can save more than $75,712 in interest on a 30-year loan, and your loan term could be reduced by 4 years and 4 months.
This is all because you have invested $40,000 in the correct account. Thus an offset account lowers your loan balance and shortens its term.
But what if you need that $40,000 right this second? You can use that because an offset account functions similarly to your normal account. Your accumulated savings are available for withdrawal anytime, but you will lose some interest.
Offset accounts can also help manage cash flow better since no tax is usually paid on savings.
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Can you use an offset account like a regular account?
An offset account is similar to a normal account but lacks exact features or functionality. So you can’t use it like a regular account.
An offset account is designed to help reduce the interest payable on a home loan by linking funds with your mortgage, reducing the total amount of the loan outstanding and associated interest charges.
As such, you can’t use your offset account to access other financial services, such as making payments, transfers or purchases.
Types of offset accounts
There are two different types of offset accounts.
100% offset account
With a 100% offset account, the entire balance of your savings or transaction account is linked to and offsets your mortgage. This means that for every dollar you have in this type of account, one dollar will be taken off the principal loan amount.
Partial offset account
A partial offset works like a 100% offset, but only a portion of your savings or transaction account is linked to the mortgage. With this option, you can decide how much of your savings you will use to reduce the amount owing on a loan.
Offset account vs redraw
An offset account and a redraw facility are two different loan features, both of which can help you save money on your mortgage by reducing the interest you pay.
By lowering the loan balance, an offset account reduces interest. A redraw facility allows you to access any extra payments you have made on your loan, but the interest is not reduced in the same way as with an offset account.
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